Commodities are an outlier at a time when most asset classes—stocks, bonds, real estate—are at or near record levels. Oil, the most important global commodity, is down 18% this year, to $80 a barrel, and many others, including natural gas, copper, and corn, are also in the red. Corn is down more than 50% from its 2012 high, to $3.75 a bushel. On Friday, gold hit a new 2014 low of $1,171 an ounce and is 38% below its peak of $1,900 in 2011.
 
The sector has few fans, a far cry from the situation in 2008 when oil hit $140 a barrel amid talk of structural shortages and a commodity supercycle. The current disfavor ought to pique the interest of contrarians. This could be a good time to allocate money to commodities, especially for investors with little or no exposure to the group.
Illustration: Dave Klug for Barron's
 
 
“Commodity investing is a little like buying insurance,” says Paul Christopher, the chief international strategist at Wells Fargo Advisors, the brokerage arm of the bank. “What will you do if inflation comes back? Inflation has tended to be accompanied by higher raw-materials cost. If inflation hits equity prices, you’ll own something that is going up.” One of the knocks against commodities in recent years was a closer correlation to stocks, thus minimizing diversification benefits. But Christopher notes that equity correlation has been weakening.
 
Christopher’s recommended commodity allocation admittedly is low at 3% to 4%. Yet, even that exposure probably is more than that of most investors.
 
Investors can get direct exposure through exchange-traded products tied to single commodities like the SPDR Gold Trust (ticker: GLD) and iShares Silver Trust (SLV), or from broader indexes, such as the PowerShares DB Commodity Index exchange-traded fund (DBC) and the iPath Bloomberg Commodity Index Total Return  exchange-traded note (DJP). The energy-heavy PowerShares ETF, now $22.30, is half its 2008 high and has a total return of about zero since its 2006 inception. The iPath Bloomberg Commodity ETN, at $34, is down by almost a third from its initial price of $50 in 2006.
 
Exchange-traded products are far less popular commodity vehicles than the equity of producers like ExxonMobil  (XOM) and Newmont Mining  (NEM). Barron’s wrote favorably about energy stocks last week. But there’s also a place for commodity ETPs because they eliminate company- and industry-specific risks. Gold, for instance, has been a much better investment than gold-mining stocks, which are at a multiyear low.
 
LOOKING AT THE BROADER commodity ETPs, the PowerShares DB Commodity Index tracks an index of futures contracts for 14 commodities; it has about a 50% exposure to oil and oil products. The index is structured to own the most favorably priced contracts; the ETF is structured as a partnership, meaning investors get a K-1 tax form.
 
The iPath Bloomberg ETN is linked to the Bloomberg index, and is one of dozens of commodity ETNs offered by Barclays. One risk: These notes are an unsecured obligation of Barclays Bank; the big United Kingdom financial company that has a solid single-A credit rating.
 
The iPath ETN is more equity-like; holders get a 1099 form. It is also more diversified than the PowerShares ETF, with agricultural commodities getting the highest weighting at 29%, followed by energy at 25%. Pure agricultural exposure comes from PowerShares DB Agriculture  fund (DBA).
 
The largest oil and natural-gas ETPs, the United States Natural Gas UNG  (UNG) and the United States Oil (USO) ETFs, each total about $700 million and are favored by traders seeking short-term energy exposure.
 
THE BEAR CASE ON COMMODITIES is well known—too much supply and not enough demand. China is slowing; Europe is on the brink of recession; and Japan is faltering again. U.S. oil production has surged. The new story line is that inflation has ceased to be a problem despite massive stimulus by global central banks. Deflation, not inflation, supposedly is the real risk. Ascendant is Princeton economist and New York Times columnist Paul Krugman, who regularly attacks what he calls fiscal-deficit scolds and inflation-phobes.
                                   
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The conventional wisdom could be wrong. Commodity markets often are self-correcting because lower prices tend to stimulate demand. And money printing ultimately could prove inflationary. Two longtime knocks against commodities—no yield and roll risk—aren’t big issues now. With rates so low globally, the opportunity cost of holding commodity-related investments is reduced, Future prices of key commodities like oil are about the same as spot prices. This means holders aren’t penalized as they roll forward their contracts.
 
Much of the institutional money that piled into commodities in 2006 through 2008 has been getting out. The Harvard University endowment, for instance, has cut its public commodity exposure to zero from 8% in 2008.
 
Fidelity Investments last year scaled back the direct commodity exposure in its Freedom target-date mutual funds, with the Fidelity Freedom 2030 fund (FFFEX) dropping its commodity weighting to 1.2% from 7.5%. The largest commodities ETF, the SPDR Gold Trust, now holds $29 billion in assets, down from a peak of about $75 billion in 2012, Morningstar data show.
 
“A lot of the hot money that came into the market has found its way out,” says John Gabriel, a Morningstar analyst. When that happens, the smart money gets back in.